The Real, Yuan and Your Soybean Prices, Part 1

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The Real, Yuan and Your Soybean Prices, Part 1

To figure out this year’s soybean price prospects, all you have to do is pencil in the whopping U.S. and South American crops, assume huge demand, guess how many soybean acres will be planted this spring in the U.S. and what kind of growing season we will have this summer. Right?

That’s most of the equation. But next you also have to factor in the climbing U.S. dollar, the sinking Brazilian currency, and finally how the Chinese will manipulate their currency along with their maneuvers in the world soybean trade. We’ll examine these three additional factors in this 2-part series called “The Real, Yuan and Your Soybean Prices.”

We covered the strong U.S. dollar in our special report called “Currency Wars” emailed to you on Feb. 6. For the first time this century, the dollar is in a potential multiyear advance against the rest of the world’s currencies due to divergent monetary policies along with an improving U.S. economy compared to sluggish growth in Europe, Asia and South America. After surging to its highest level in more than 10 years in January, the dollar index has been taking a breather this month by trading sideways below its late January spike high. The dollar is waiting for a clear signal from the Federal Reserve on when the Fed may raise interest rates later this year.

Following a 10-year depreciation of the U.S. dollar from 2002 to 2011, a moderate appreciation began in 2012 and 2013. The dollar then surged during the second half of 2014 into January 2015 to its highest level in more than a decade. USDA projections are based on a moderate appreciation of the dollar for the next decade.
Our dollar has been especially strong against the Brazilian real, which has fallen to its lowest level against the dollar since 2004 as the Brazilian currency suffers from a weak economy and declining prices for Brazil’s main commodity exports. Commodities now account for nearly half of Brazil’s exports, up from about 30% a decade ago, for the world’s seventh largest economy.
In the past 6 months, Brazil’s real has fallen the most among the 16 major currencies tracked by Bloomberg on concern that the stalled Brazilian economy and fiscal weakness will lead to a sovereign credit downgrade. The Brazilian real weakened nearly 13% against the dollar in 2014 and another 8% so far this year. Against the Chinese yuan, the Brazilian real has depreciated 17% since the beginning of January 2014.
Unlike so many other central banks recently, Brazil’s central bank has actually tried to support its currency, but its efforts have been overpowered by the country’s weakening economic outlook. Last month, the central bank of Brazil hiked interest rates by 50 basis points to 12.25% to try to control inflation which hit 7.14% in January.
Some exporters are banking on Brazil’s weaker currency to spur foreign sales in 2015. However, the U.S. has been able to hold its own with its soybean exports expected to be a new record this year. A senior USDA economist explains that “soybean exports may not be as price sensitive as you might think.” Our stronger dollar doesn’t have the same negative effect on our soybean exports like it does on our wheat exports where the U.S. share of the world wheat trade has shrunk to only 16%. For soybeans, the U.S. ships about 40% of the world’s soybean trade.
Producers React to Changing Market Dynamics
March – May 2014
• Soy/corn price ratio @ 3.1 (rising trend)
• Average price $14.65/bu. 
• Ending stocks 92 mil bu.
• Brazil Oct 1 stocks: 16.5 million tons
• Real Exch rate: 2.25 (strengthening Real)
March – May 2015
• Current soy/corn price ratio @ 2.5 (flat trend).
• Average price $9.93/bu.
• Ending stocks (proj) 385 mil bu.
• Brazil Oct 1 stocks: 24.8 million tons
• Real Exchange rate: 2.88 (weakening Real)
Source: USDA 2015 Ag Outlook Forum. The Brazilian real exchange rate has been updated to its current value. The original slide had a 2.72 exchange rate, the rate earlier this month.

When we compare U.S. port price to Brazil’s port price, the Brazilians are selling beans at a $20 per ton discount to the U.S. As the Chinese return from their New Year’s holiday, their buying shifts to South America origins. Despite stiff competition from Brazil, USDA projects that U.S. soybean exports will exceed 48 million tons, which is an 8.7% increase over the previous marketing year. USDA has raised their U.S. soybean export forecast by $1.5 billion since November because of the strong demand from China.
While the United States should lead the world in soybean exports into the 2015-2016 crop year, Acting Chief Economist Robert Johansson told the USDA Outlook Forum that Brazil could overtake the United States the following year. Brazil becomes the world’s largest soybean exporter not because their soybeans are cheaper from the falling real but because Brazil is projected to increase their planted acreage an average of 1.8% per year during the next decade. Soybeans remain more profitable to produce than other crops in most areas of Brazil.
Becoming the world’s largest soybean exporter also assumes that Brazil will be able to improve their transportation system to handle the larger export business.
Politics and logistics can often be more of an uncertainty in South America than actual production. The current truckers strike in Brazil can hardly be reassuring to a major importer like China who imported 6.88 million tons of mostly U.S. soybeans in January, down from record high arrivals of 8.53 million tons in December.
Part 2 of this series will examine the Chinese manipulation of the yuan and the Chinese growing demand for soybeans.
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